Sensational SEC Finding: Backtest gone bad!

Sensational SEC Finding: Backtest gone bad!

December 23, 2014 Uncategorized
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(Last Updated On: December 23, 2014)

The SEC landed a $35mm fine against F-squared yesterday!

A quote from the the SEC filing:

The inaccurate compilation of historical data substantially improved the AlphaSector’s strategy’s advertised back-tested and hypothetical historical performance for the pre-October 2008 period. If an investor made a hypothetical investment of $100,000 on April 1, 2001 (assuming a reinvestment of dividends and no further contributions or withdrawals), the investment would have been worth approximately $128,000 on August 24, 2008 if invested in the S&P 500 Index. With accurately timed (but still hypothetical and back-tested) signal implementation, the same investment in F-Squared’s hypothetical ETF sector rotation strategy would have been worth $138,000. However, by implementing the hypothetical and back-tested signals one week early, F-Squared advertised the investment as worth $235,000.

So advertised backtest result grew the assets to $235k, when in reality the strategy would have only grown to $138k!

Be careful of backtests…beating the markets is nearly impossible!

http://blogs.cfainstitute.org/investor/2014/11/06/mission-impossible-beating-the-market-forever/

 


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About the Author

Jack Vogel, Ph.D.

Jack Vogel, Ph.D., conducts research in empirical asset pricing and behavioral finance, and is a co-author of DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His dissertation investigates how behavioral biases affect the value anomaly. His academic background includes experience as an instructor and research assistant at Drexel University in both the Finance and Mathematics departments, as well as a Finance instructor at Villanova University. Dr. Vogel is currently a Managing Member of Alpha Architect, LLC, an SEC-Registered Investment Advisor, where he heads the research department and serves as the Chief Financial Officer. He has a PhD in Finance and a MS in Mathematics from Drexel University, and graduated summa cum laude with a BS in Mathematics and Education from The University of Scranton.